Article

Swiss banks flourishing despite end of confidentiality


Added on 13/02/2017

It’s almost two years since Julius Baer completed the acquisition of Leumi Switzerland from Bank Leumi (TASE: LUMI), and the Swiss bank is pleased with the deal, reports Globes. “We’re very satisfied with the results of the acquisition. Leumi did a superb job of managing its clients during the process and this is proved by the fact that almost no customers left the bank due to the transfer of ownership,” Stephen Kamp, Deputy Head of Europe at Julius Baer whose responsibilities include Southern Europe and Israel at Julius Baer told "Globes."

Leumi Switzerland managed private banking assets worth 5 billion Swiss francs and Julius Baer paid 10 million Swiss francs in return for its asset portfolio. At the time of the acquisition, Leumi was nearing the end of an investigation by the US tax authorities into whether it had helped its customers evade taxes – a case that eventually cost Bank Leumi $400 million in settlement fees. During that period, Bank Leumi CEO Rakefet Russak-Aminoach decided that the bank would exit from its overseas private banking operations, and the centerpiece of liquidating that business was the sale of Leumi Switzerland to Julius Baer.

Leumi was in a hurry to get rid of its bank in Switzerland in the wake of the investigation. Wasn’t it like putting your neck in a noose?

“I don’t know what drove Leumi to sell its operations in Switzerland. It was probably a strategic decision to focus on core businesses, which came when we were seeking to expand. In any case, we didn’t buy it with our eyes shut. We have a very strong team that carried out the due diligence.”

Did you discover any problematic customers and ask them to leave?

“I prefer not to elaborate on this topic. In general, it can be said that at our own initiative we can drop clients who don’t meet the regulatory rules, but if this happened, it was before the transfer of ownership from Leumi to Julius Baer. The checking process takes place before the transfer. You don’t transfer clients to yourself and then inform them they aren’t suitable.”

Leumi is not the only bank to cut back its overseas operations. Bank Hapoalim sold part of its international private banking operations and it’s possible that in the future, it will sell off Poalim Switzerland entirely. Will you want to buy it?

“There have been rumors that we are buying Poalim Switzerland but the bank does not respond to rumors. Poalim Switzerland is more of a Swiss bank but it has a good reputation similar to Leumi. Generally speaking, we are in a position of looking at the market and checking out possible acquisitions. I believe we will continue to grow through acquisitions and we have the ability to do this from the standpoint of liquidity. However, the pace of acquisitions will slow down in comparison with recent years so that we can properly digest and absorb what we have already acquired during the past decade.”

The cloak of secrecy has been torn

The field of private banking in the world in general, and in Switzerland in particular, has undergone dramatic changes over the last decade. Regulators in the US realized that many customers were spiriting money into offshore banks under the umbrella of banking confidentiality. When the authorities declared war on tax evasion and severely tightened regulations, the cloak of secrecy was torn open significantly.

At the same time, the Americans opened investigations into several banks in Switzerland. In Israel, as noted, Leumi has already reached a settlement, while the investigations into Bank Hapoalim (TASE: POLI) and Mizrahi Tefahot Bank (TASE:MZTF) are still going strong. Julius Baer was also included in the list of banks under investigation and it concluded the case last year by paying a fine of $547 million. While various banks shut down their overseas private banking operations as a result of these worldwide changes, Julius Baer just grew and is seeking further expansion.

How is your expansion drive being expressed?

“We engage solely in private banking so our strategy is to engage in this field in many countries throughout the world. We seek out opportunities to grow and during the past 10 years, we did this through making about 15 different acquisitions, mainly in Switzerland but also in Europe, Latin America and Asia. Our main acquisition was Merrill Lynch’s international wealth management business based outside the US”

What is the future of private banking after losing its foremost value – confidentiality?

 “It’s true that total banking secrecy is no longer a distinguishing advantage for Switzerland. The country particpated in a data exchange program with various governments and fell into line with the rest of the world. But this must be put in proportion: Switzerland is known not only for its banking confidentiality but also for the experience it has accumulated in money management and that’s an important factor when the world’s wealthy citizens are searching for somewhere to manage their money.

“One-third of the liquidity of the world’s wealthiest people is concentrated in North America. The majority of the money there is held in local banks but the situation in the rest of the world is different. There are a great many rich customers in various countries who want to spread risk and hold money outside the country where it originated, especially in cases where the country of origin is not sufficiently stable. In this context, Switzerland remains the most important place for international customers due to its tradition, stability and the experience it has gathered.”

That is to say, the investigations, heavy fines and decline in banking confidentiality have not hurt the Swiss banking industry?

“Not really. Switzerland remains an international platform for the management of money. If you look at the volume of private assets managed by Swiss banks, the numbers just kept going up. Swiss banking grew significantly over the past decade because global wealth continued to increase and new markets opened for us.

“What has changed is the origin of the customers; in recent years, most of the new clients have come from emerging or growing markets such as China, Eastern Europe, Latin America, the Middle East and of course, from Israel. Moreover, Switzerland’s domestic market also grew, among other reasons, as a result of foreigners who moved there to live.”

In any case, we see many foreign banks exiting from their operations in Switzerland.

“That’s true. If once there were 300 banks in Switzerland, today there are less than 150. The reason for this is the tightening of regulation on the country’s banks, which increased costs. Thus, you need to have a large volume of assets in order to meet these expenditures. That’s why banks are closing or merging and why the advantages of growth have become fundamental.

“Concurrently, revenues were eroded due to increased competition and the absence of the ‘confidentiality premium,’ for which the customers paid money. We are dealing with this by creating new products and increasing the volume of assets under management without a concomitant rise in operating expenses.”

Another threat that’s relevant to the entire banking system comes from fintech (financial technology), which is offering technological solutions for banking products. Are you feeling the effects of this threat?

“Fintech is more threatening to payment systems and retail banking operations, and less so to private banking. In my opinion, robot advice for investments is also less threatening to our industry, which is based on human experts. I think that in the field of private banking, human relationships and service are no less important than the returns. I don’t view fintech as a threat; rather, it’s a complementary tool we can learn from. We constantly keep up-to-date in this industry and we have an internal department that is working on this subject.”

“The rise in the number of rich people in Israel doesn’t come only from high-tech”

Julius Baer opened an official representative office in Israel four years ago, and it has been part of Kamp’s responsibilities from the outset. A Jew of Dutch origin, Kamp, 48, grew up in Italy and began his banking career at the Dutch bank ABN AMRO. He then moved over to the private banking division of HSBC. He joined Julius Baer in 2012 and was responsible for the bank’s Latin America and Israel operations.

In September 2016, Julius Baer carried out structural changes that included the transfer of Israel to its European division, and Kamp continued to be responsible for it, along with Southern Europe.

“Since 2008, Israel has been one of the 10 fastest-growing economies in the world. We focus on countries that are continuing to grow, and that includes Israel. According to various reports from international accounting firms and consultancies, it emerges that Israel is one of the 10 markets in which the rate of wealthy people – that is, those with liquid assets totaling more than $1 million – is the largest relative to the general population. And most of them are concentrated in cities such as Tel Aviv, Herzliya Pituah and Jerusalem, so it’s easier to locate them,” Kamp says.

Are we speaking mainly of high-tech entrepreneurs who made an exit?

“The increase does not come solely from high-tech people who made exits. Israelis in general are entrepreneurs in real estate, industry and other fields. It’s amazing how many Israeli businesspeople we meet in other countries. Therefore Israel is one of our strategic markets.”

And what’s the competition like against other bodies in the private banking business here?

“The competition in the Israeli market is fierce, regarding both the Israeli banks and the foreign banks that have been operating here for many years. There are a lot of young people here who tend to work with Israeli banks they’ve been familiar with since childhood or those that helped them in business. However, they are also likely to join forces with a Swiss bank to manage at least part of their money.”